Even though home ownership is at an all-time high, soaring costs and relatively flat wages make affordability a growing problem for millions of low- and moderate-income workers, according to a Harvard study released Monday.
Moreover, millions of “desperate” buyers are putting themselves at risk because of the proliferation of risky, interest-only loans, raising the prospect of a painful collapse in booming markets on both coasts, according to a principal author of the study.
“We continue to marvel at the strength of the housing sector,” said Nicolas Retsinas, director of Harvard’s Joint Center for Housing Studies, which produced the report.
“At the same time it is easy to misread that strength,” he said. “It doesn’t apply to all places and all parts of the housing sector. … We see the dark side of this housing boom in terms of the (mortgage) products that shift the risk onto people who may be desperate to get into homes.”
The center’s comprehensive annual report on the state of the nation’s housing documents the soaring use of once-exotic mortgage loan products like interest-only loans, which accounted for a quarter of all mortgages last year. Overall 35 percent of mortgage loans last year carried adjustable rates, up from just 18 percent the year before.
In the mid-1980s, more than 50 percent of mortgages were adjustable, but back then short-term rates were significantly lower than rates on traditional 30-year mortgage loans. The difference now is that home buyers essentially are grabbing loss-leader rates that are almost certain to require sharply higher payments in a year or two.
“People are desperate,” Retsinas said. “They are afraid they are going to miss out and they are only thinking of one thing: What is the minimum payment I can make and still afford this house next year?”
The center’s study also points to what it calls the worsening problem of affordability, especially among lower- and middle-income workers.
One-third of households spend more than 30 percent of their income on housing, and more than one in eight spends more than 50 percent. The number of such cost-burdened household jumped by 5 million from 2000 to 2003, the center calculates.
Millions of more workers endure long commutes to be able to afford their housing. About 8 percent of workers reported commuting more than an hour to work in 2000, up from 6 percent a decade earlier. Use of public transit and car pooling declined over the same period.
The increasing prevalence of adjustable and interest-only loans is adding to concerns that a bubble is forming in the nation’s housing market, especially in the red-hot markets of California, south Florida, New York City and elsewhere. Federal Reserve Gov. Susan Bies this week warned of an “an aggressive lending culture” on mortgages, and Fed Chairman Alan Greenspan also expressed concern.
“The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other relatively exotic forms of adjustable-rate mortgages are developments of particular concern,” he told a congressional panel.
Retsinas finds himself “a bit more bearish” this year than he was a year ago, but he said it would take a sharp increase in mortgage rates coupled with a severe economic downturn to reverse the momentum of the housing market nationwide.
He pointed out that the nation’s housing industry has been growing for a record 13 consecutive years, eight years longer than the previous record expansion. The market was booming even when 30-year mortgage rates were well above 7 percent, compared with less than 6 percent currently.
And the Harvard study is generally bullish about the long-term prospects for the housing industry, mainly because of demographic trends including immigration that make it likely household formation over the next decade will probably surpass the rate of the past decade, about 1.2 million a year.
Constraints on growth in many metropolitan areas mean the housing industry will barely keep up with the pace, keeping demand strong, especially in coastal areas and big cities.
“Even baby boomers are still buying homes,” said Retsinas. He pointed out that one in five homes last year was purchased by a buyer over 50 years old.